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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A PMS portfolio manager's performance is compared with a benchmark. Which statement best describes why a benchmark is used in performance evaluation?

A benchmark serves as a reference yardstick, an index representing a comparable market segment or style, against which a portfolio's return is judged to see whether the manager added value. It guarantees nothing and does not set fees.

  1. AIt guarantees a minimum return to the client
  2. BIt provides a reference yardstick of a comparable market segment against which the portfolio's return can be judgedCorrect
  3. CIt fixes the management fee payable by the client
  4. DIt determines the minimum investment amount for the strategy

Explanation

A benchmark is a reference index representing the investment style or market segment of the strategy. Comparing portfolio returns against it shows whether the manager added value. It does not guarantee returns, set fees, or set investment minimums.

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